The Bank of England has raised rates by 0.25%
The Bank of England has raised rates by 0.25%. This is the first rise for ten years. The Bank Governor Mark Carney in the press conference described this as taking the foot off the accelerator and we should view this move in that light. It is not designed to put a brake on the economy.
The fall in unemployment has removed much of the slack in the economy giving them room to make a move now. They have warned that rates would move up so this was not a surprise for markets and if anything the language of the statement was less aggressive, they now believe future hikes will be in line with market expectations rather than warning of faster rate moves. This implies only two further quarter point rate rise in the next three years.
Variable rate mortgages are likely to see rates rise but the Governor pointed out that 60% of mortgages are on a fixed rate. Fixed rate offers had already moved up a little ahead of the announcement but five year fixed rates maturing now may still be able to reset about 2% lower and 2 year mortgages 0.3% lower. The impact on individual mortgage payments will on aggregate be muted with little discernible impact on consumer spending for the time being.
The Bank noted that wages have been rising less than inflation but they expect inflation to have peaked in October and it to come back slowly as the post Brexit fall in Sterling has less impact. The Bank of England agents around the country speak to business and while they expected little wage growth this year they expect it to pick up next year. However, this is dependent on productivity growth which has consistently disappointing for some years.
Markets appear to have taken their lead from a slightly softer tone and the pound has fallen about 1% against the Dollar, ten year gilts yields are down 0.05% (price up 0.5%) and the FTSE 100 index has moved up 0.5%. Inflation expectations have moved slightly higher with index linked gilts rising slightly more than conventional bonds.
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